Irrevocable Credit
Irrevocable credit is the most important activity in the field of international trade and payments. It is defined by the International Chamber of Commerce (ICC) as a bank-after agreement to make payments against the presentation of documents that comply with the terms of the credit. An irrevocable credit provides a guaranteed payment from the buyers bank to the sellers bank prior to shipment of goods.
Irrevocable credits are the most secure method of conducting international trade because they provide irrevocable protection to both the seller and the buyer against non-payment or failure to deliver goods by the other party. Whereas demand letters of credit, the most common type of credit, can be amended and canceled, an irrevocable credit removes the ability for either party to amend or cancel the terms of the transaction. As such, an irrevocable credit is binding upon both parties and there is no room for misinterpretation or contention.
The irrevocable credit is the most reliable method of payment instrument in international trade because the issuing bank guarantees payment when the necessary documents are presented and all terms and conditions of the agreement are met. Furthermore, since the buyers bank is under obligation to make payment, the buyer is bound to perform as agreed upon and cannot unilaterally change, vary or add any of the terms and conditions.
Once issued, the terms of an irrevocable credit cannot be modified unless agreed upon by both parties. In some circumstances, an amendment of the terms may be allowed and supported by a confirmation of an issuing bank. However, the beneficiary should be prepared to accept an amendment if needed, since it is the only way the issuing bank can protect itself against the possibility of receiving a claim from the beneficiary.
An irrevocable credit typically requires a time frame within which performance of the obligation is to be completed and usually permits the issuing bank to pay for the goods within 30 to 90 days. Furthermore, the credit should detail the supplier’s necessary documentation as well as the condition of payment. The documents must either guarantee payment or identify proof that goods have been delivered to the buyer.
The security offered by irrevocable credits usually allows for a lower risk of non-payment or non-delivery for both parties. Additionally, it allows for easier monitoring and enforcement of payment obligations, as well as better control of delivery risks and increased traceability of payment transactions. banks can exercise greater control over the direction of payment flows, which can greatly reduce their exposure to risk.
In conclusion, irrevocable credit is a secure and convenient way of conducting transactions in international trade. This method allows both parties to guarantee payment and delivery, thus minimizing the possibility of non-payment or non-delivery. Although more complex than demand letters of credit, it is often the preferred method to protect against financial risks.
